Why New Balance Factories Will Close If TPP Passes—The Deal Explained

The Trans Pacific Partnership. A name simultaneously so grand and so vague that it’s easy to find it either ominous or inspirational, depending on your disposition. At the highest level, the TPP is pretty easy to understand. It’s a big free trade agreement—the biggest ever in fact—between some Pacific Rim countries. Start delving into the details, however, and you quickly find yourself submerged in endless trade legalese that is only fully understood by a handful of lawyers in each of the participating countries. As with many economic political issues, this complexity makes the deal all too easy to convert into talking points. To cut through that, in this post I’ll cover basic facts about the TPP and how it may affect Maine, as well as some of the broader issues often brought up in discussion of the deal.

The TPP is a free trade agreement between twelve countries around the Pacific:

Australia

Brunei

Canada

Chile

Japan

Malaysia

Mexico

New Zealand

Peru

Singapore

United States

Vietnam

These countries have all signed the agreement, but it will not come into force until it is ratified by their respective governments. In the U.S., that means Congress must approve it. If ratified, it will be the largest free trade area in history, representing 40% of the GDP of the Earth. Most other Southeast and East Asian countries have also expressed some interest in joining, but have yet to do so.

The agreement itself is huge, consisting of many thousands of pages, and it covers just about everything you could think of. There are the obvious tariff reductions, with tariffs on thousands of goods across the twelve countries being eliminated. On top of that, there are provisions to streamline customs and business visas, ease foreign investment restrictions, standardize intellectual property rights, facilitate investor-state dispute settlements, and implement the right to freedom of association and labor bargaining (aimed largely at communist Vietnam), among many other things.

The net effect of the TPP on Maine—and the U.S. as a whole—is as unclear as with any trade agreement. Some will win, some will lose. However, there are some direct, tangible effects of the agreement that we can look at. The most glaring is its impact on New Balance. New Balance operates three factories in Maine that employ about 900 people in total. The shoes they make there have a viable spot in the U.S. market because of large tariffs on shoes coming in from other countries, most notably, out of the TPP members, Vietnam. There is a range of tariffs on dozens of specific categories of shoes, each carved out to deal with specific manufacturers, but many reach as high as 37.5%. Under the TPP, every single one of those will be zeroed out. Some will be axed immediately, while others will be phased out over up to eleven years. But twelve years after the TPP is ratified, there will be no more U.S. tariffs on shoes coming from TPP countries.

All other things being equal, this could very well spell an end to New Balance’s U.S. manufacturing operations. Despite stated preferences, consumers do not seem to be willing to pay much of a premium for American-made products in practice. If New Balance were to keep their U.S. operations going, they may be selling their shoes on shelves next to similar products that are 20+% cheaper, an amount that few regular buyers will be interested in shelling out for a “Made in America” tag. New Balance already sources most of its products overseas, so will benefit in many ways from the TPP as a company, but their 1,400 workers in Maine and Massachusetts will be under pressure.

If you’re wondering why the U.S. would want to agree to this tariff reduction, it is important to remember that this part of the agreement is really about competition between U.S. companies. Brands like Nike make shoes in Vietnam, so having the tariffs removed will be a huge benefit for their business. This is a fact that is generally important to keep in mind: free trade agreement negotiations are not about the U.S. winning or losing to other countries—they are about different U.S. companies winning or losing. At the end of the day, it is always U.S. brands or stores selling the products made overseas. Nike likes the TPP; New Balance doesn’t.

What could save New Balance’s U.S. operations is a deal with the Department of Defense to provide shoes for members of the military. As has been in the news recently, such a deal had been in the works, but the DoD has stalled and seemingly reneged on their promise to require American-made shoes for troops. Maine’s members of Congress have not been pleased by this, and have sponsored legislation that would require the Pentagon to buy American-made shoes. Whether this will succeed and whether the contract would be enough to keep Maine’s New Balance factories running is an open question (it’s also possible that another company, like Wolverine Worldwide, could win the contract bid). None of this is very good news for Maine’s New Balance employees. There may be other ways the TPP will force Maine manufacturers to close, but New Balance is by far the clearest example.

On the flip side of these effects is the boost the deal could give to Maine’s exporters. As I mentioned in my first post about trade deals, the benefits of free trade tend to be more dispersed and harder to identify than the costs—they manifest in general price decreases as opposed to specific job losses. Maine businesses export hundreds of millions of dollars’ worth of goods to TPP countries that the U.S. currently has no free trade agreements with (Maine exports even more to TPP countries the U.S. already has agreements with, like Canada). Malaysia and Japan are both in the top 5 destinations for Maine exports. Seafood, forestry, health, transportation, and IT products are some of the industries that currently face high tariffs in the TPP countries they are exporting to, almost all of which will be immediately eliminated by the agreement. The lifting of these tariffs could be a real boon for Maine businesses—potentially enough to offset the hit to New Balance. The benefits for U.S. exporting businesses is one of the main points argued by TPP proponents to those who are concerned about job losses.

The caveat is that there is an assumption that it is only those tariffs and other trade barriers that are keeping Maine and U.S. businesses from exporting more to those countries. It is assuming that there are domestic competitors propped up by these barriers that American firms would beat out on an even playing field, or it is assuming that there is a significantly larger market for products if they were only cheaper. In some sectors, this is undoubtedly true. But is it true for each of the thousands of products that the TPP is lifting trade barriers on? Is it true for each of the TPP markets that Maine’s 1,000+ exporting companies are competing within? Probably not. It may be true that Maine’s businesses exporting IT products to Malaysia, for example, will be better situated to compete against low-cost Chinese competitors, but lobster will probably not become the poor man’s food of Japan with the lowering of its tariff there. This is not to say it won’t benefit some or many of Maine’s exporting businesses, but take any overstated claims of massive export growth with a grain of salt.

It is worth touching on some other components of the TPP that are often discussed, although they are not Maine-specific. The national security benefits are a major selling point of the TPP to many in the policy world. Dozens of generals and former secretaries of defense and other cabinet members have endorsed the deal for this reason. The argument centers on the constant refrain we have heard from Obama about the deal: that if we don’t do it, we will be letting “China write the rules” in the region. While he’s talking about writing economic rules, there is a not-so-subtle hint at the geostrategic implications of giving China the pen. As the economic behemoth of Asia, allowing China to deepen regional dependence on their economy would give them the political upper hand in the area at a time when they are being very aggressive over territorial claims and other diplomatic issues. Strengthening the economic ties of countries in Asia, particularly Southeast Asia, to the Western Hemisphere gives them a diverse portfolio of trading partners and lets them be less dependent on China.

Another aspect of the TPP you may have heard about is investor-state dispute settlement (ISDS). Broadly, this is a provision that allows companies to sue the governments of TPP countries if they do something that violates the terms of the agreement and infringes on their business. Notably, the dispute is settled by a special international arbitration system set up solely for this purpose, not by domestic courts. This type of thing has become a relatively common feature of free trade agreements. The general idea is simple: it’s not fair for a company to have its land seized, its products trashed, or any other number of clearly unfair things a country could do to a company, and the company should have some form of recourse. These provisions aren’t used often, and the U.S. government has never lost one of these suits. The U.S. has fifty agreements with these provisions and has faced a total of seventeen ISDS cases in the last twenty-five years. This is a reasonable element to include to ensure that companies can invest in other countries with faith that their business won’t be arbitrarily and unfairly infringed upon. Unfortunately, some companies have abused it, most notably with the recent suit brought against Australia by tobacco company Philip Morris. Philip Morris is suing Australia over a law passed requiring onerous packaging on cigarettes declaring the health risks. The idea that a tobacco company could sue a country for trying to protect its citizens from the terrible effects of cigarettes is understandably scary for many people. The TPP actually looks to address this, not only by explicitly acknowledging countries’ rights to regulate health, environmental, and other issues in the public interest, but also by specifically barring tobacco companies from partaking in the system. Senators from tobacco-rich states, namely Senate Majority Leader Mitch McConnell and Senator Thom Tillis of North Carolina, have unsurprisingly taken issue with this provision.

One other component of the whole process worth understanding is the trade promotion authority (TPA) passed by Congress last year. I mentioned in my previoustwo posts that this vote was seen by many as a referendum on the TPP, and all four members of Congress from Maine voted against it. What TPA does is require ratification of free trade agreements to follow a fast track process through Congress. These bills can’t receive amendments and have a truncated debate process, meaning they can’t be filibustered. This means that the TPP, when it comes before Congress, will receive a simple up or down vote and needs a simple majority to pass. From the point of view of those who negotiated the agreement, this is obviously a great thing; finalizing these agreements with other countries takes years, so having to renegotiate the whole thing because every member of Congress wants to stick their own exemptions in there would make the process nearly impossible. But if you are opposed to, or even just skeptical of, free trade, it is hard not to see TPA as a cheap workaround to avoid having to subject agreements to thorough public scrutiny. Good or bad, TPA passed, so it is the law of the land once again (it was also active from 1974 to 1994 and 2002 to 2007). This makes the eventual passage of the TPP much more likely, although anything could happen after this November.

There you have it: what you need to know about the TPP as someone living in Maine. It is difficult, if not impossible, to pinpoint whether the deal will be a good or bad thing on the whole for the state—or the country—purely because of how massive it is. It comes down to whether exporting businesses can grow enough to offset the loss of businesses replaced by imports. We don’t even know for sure if NAFTA had a net positive or negative impact on the country after 20 years, so nobody can definitively say in advance what the TPP will do.

That ambiguity is a problem. Whether or not you should support the TPP really depends on your faith in the ability of communities to adapt. To insert my own opinion here, in the long run, I do think the TPP and things like it are good for everyone. Greater economic integration is not only beneficial from a pure efficiency perspective, but a greater exchange of people and ideas is also a surefire way to advance technology, education, and our broader culture. It is worth remembering that many of the miracles of our modern economy—the ubiquity of affordable smartphones and computers whose capabilities would have astounded people just twenty years ago, for instance—we owe to free trade.

In the short run, however, I am far less optimistic about the TPP’s impacts. State and federal governments have shown little capacity to effectively respond to the economic changes brought about by international trade. Officials see trade deals as opening up a fantastical future of new opportunities, but the real communities suffering from job losses are given little help in reaching these mythical new economies. There is not much done to mitigate the harm of transition beyond limited Trade Adjustment Assistance programs that workers have to fight for and often don’t receive, and that harm can be substantial enough that communities are unable to recover. Factories close, stores close, people move away and never come back. The resulting pain is being laid bare in the current presidential election—not least by the fact that every top candidate opposes the TPP.

The hope is that the growth in new businesses will make up for the shrinking of old ones, but there is not nearly enough being done to ensure that actually happens. It can feel as though it is being left to chance, which is not a sign of good policy. It’s wonderful that U.S. exporters will have greater access to foreign markets under the TPP, but it is hard to imagine many people losing their old factory jobs will be able to easily take advantage of this. Skills from shrinking industries will not necessarily be applicable to the growing ones. I do support the TPP, but not by itself. Its benefits won’t fully come to fruition if it is not paired with serious help to move negatively affected communities forward.

But do not mistake the obstruction of the TPP for progress. If the TPP fails, that only means a continuation of the status quo. Manufacturing jobs will still be lost, families will still be strained, and communities will still have to question their economic viability. The ideal situation would be a passage of the TPP in conjunction with programs far more robust than the Trade Adjustment Assistance we have now. We need something that would allow the struggling communities of Maine to harness the strength of the global economy instead of being broken by it.

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About Phoenix McLaughlin

Phoenix McLaughlin works at the National Endowment for Democracy helping to foster political development in Asia. Phoenix lives in Washington, D.C. now, but was born and raised in Norway, Maine. In between, he has studied and/or worked in Colorado, Nepal, India, France, Ethiopia, and Augusta. All opinions expressed on this blog are solely his own and do not represent his current or former employers.

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Phoenix McLaughlin

Phoenix McLaughlin works at the National Endowment for Democracy helping to foster political development in Asia. Phoenix lives in Washington, D.C. now, but was born and raised in Norway, Maine. In between, he has studied and/or worked in Colorado, Nepal, India, France, Ethiopia, and Augusta. All opinions expressed on this blog are solely his own and do not represent his current or former employers.